Sovereign liquidity snapshots | FT Alphaville

Sovereign liquidity snapshots

Curious, this. The European Central Bank dialed back its buying of eurozone government bonds last week despite panic swamping Portuguese and, in particular, Irish bonds. The ECB bought a scant €134m of bonds, versus €323m a week earlier.

Or is it so curious? Perhaps it’s really just a lesson in liquidity.

For example, IFR Markets’ Divyang Shah got his prediction for the week’s ECB bond purchases (€400m) wrong last Friday, but at least he was right on why the bank makes purchases:

…the ECB’s intervention is making sure that illiquidity and lack of market making is not the driving factor behind movements on Irish and Portuguese debt. The ECB has shown a willingness to step into the market and even if this support is modest it has been enough to make sure that there is no liquidity hole and that the market continues to function.

While Irish and Portuguese sovereign debt markets have become very illiquid they have not fallen apart completely from a market-making perspective as bid/offer spreads are significantly narrower than those seen in early May. This would help explain why the ECB is not yet worried enough to conduct Greek style aggressive intervention despite the record wide spreads on Irish and Portuguese debt.

The results can be seen in this pair of graphs charting bid-ask spreads in Portuguese and Irish government bonds this year:

So, liquidity for Europe’s two riskiest sovereigns (excluding Greece) is healthy-ish, for now. Which makes reports that the ECB has ‘considered activating’ the EFSF to rescue Ireland even more strange — especially as only countries can ask for activation.

The CDS market is a bit less clear on Ireland and Portugal, though.

First, via Markit on Monday, there are curious signs of uncertainty in the markets for Ireland and Portugal credit default swaps.

The following chart from Markit’s data shows the bid-ask spreads for the two sovereigns, and for Spain and Italy:

Basically, the difference between the prices bid and asked for Spain and Italy CDS has stayed well below 10bps in August and September, levels similar to those seen before the Greek debt crisis exploded in March –entangling other euro-peripheral sovereigns.

By contrast, Ireland and Portugal’s bid-ask spreads generally haven’t pushed back down below 10bps over the same period. Indeed, they’ve rather taken off since the middle of September, beyond the widening of Ireland or Portugal’s actual CDS spreads.

The spreads here aren’t exactly at Greek crisis levels at the moment — average bid-ask reached 35bps for Portugal CDS back then.

But interestingly, both Ireland and Portugal retain Markit’s highest score for CDS liquidity. This includes other measures like the number of dealers producing quotes. And — for reference — here’s a chart from CMA Datavision of quote activity on Ireland and Portugal CDS:

Some uncertainty stalking the market, in any case.

Bonus chart – did you know that Ireland CDS was trading wider than Iceland CDS?

Well, you do now.

Related links:
Europe is Lehman-fied – FT Alphaville
Ireland, Portugal market-implied ratings take a tumble – FT Alphaville
A year in the life of sovereign CDS – FT Alphaville